§848 — Capitalization of certain policy acquisition expenses
16 citing cases
Statute Text — 26 U.S.C. §848
In the case of an insurance company—
specified policy acquisition expenses for any taxable year shall be capitalized, and
such expenses shall be allowed as a deduction ratably over the 180-month period beginning with the first month in the second half of such taxable year.
Paragraph (2) of subsection (a) shall be applied with respect to so much of the specified policy acquisition expenses of an insurance company for any taxable year as does not exceed $5,000,000 by substituting “60-month” for “180-month”.
If the specified policy acquisition expenses of an insurance company exceed $10,000,000 for any taxable year, the $5,000,000 amount under paragraph (1) shall be reduced (but not below zero) by the amount of such excess.
In the case of any controlled group—
all insurance companies which are members of such group shall be treated as 1 company for purposes of this subsection, and
the amount to which paragraph (1) applies shall be allocated among such companies in such manner as the Secretary may prescribe.
For purposes of the preceding sentence, the term “controlled group” means any controlled group of corporations as defined in section 1563(a); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply, and subsection (b)(2)(C) of section 1563 shall not apply to the extent it excludes a foreign corporation to which section 842 applies.
Paragraph (1) shall not apply to any specified policy acquisition expenses for any taxable year which are attributable to premiums or other consideration under any reinsurance contract.
For purposes of this section—
The term “specified policy acquisition expenses” means, with respect to any taxable year, so much of the general deductions for such taxable year as does not exceed the sum of—
2.09 percent of the net premiums for such taxable year on specified insurance contracts which are annuity contracts,
2.45 percent of the net premiums for such taxable year on specified insurance contracts which are group life insurance contracts, and
9.2 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A) or (B).
The term “general deductions” means the deductions provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions) and in part I of subchapter D (sec. 401 and following, relating to pension, profit sharing, stock bonus plans, etc.).
For purposes of this section—
The term “net premiums” means, with respect to any category of specified insurance contracts set forth in subsection (c)(1), the excess (if any) of—
the gross amount of premiums and other consideration on such contracts, over
return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts.
The rules of section 803(b) shall apply for purposes of the preceding sentence.
In the case of an insurance company subject to tax under part II of this subchapter, all computations entering into determinations of net premiums for any taxable year shall be made in the manner required under section 811(a) for life insurance companies.
Net premiums shall be determined without regard to section 808(e) and without regard to other similar amounts treated as paid to, and returned by, the policyholder.
Premiums and other consideration incurred for reinsurance shall be taken into account under paragraph (1)(B) only to the extent such premiums and other consideration are includible in the gross income of an insurance company taxable under this subchapter or are subject to tax under this chapter by reason of subpart F of part III of subchapter N.
The Secretary shall prescribe such regulations as may be necessary to ensure that premiums and other consideration with respect to reinsurance are treated consistently by the ceding company and the reinsurer.
For purposes of this section—
Except as otherwise provided in this paragraph, the term “specified insurance contract” means any life insurance, annuity, or noncancellable accident and health insurance contract (or any combination thereof).
The term “specified insurance contract” shall not include—
any pension plan contract (as defined in section 818(a)),
any flight insurance or similar contract,
any qualified foreign contract (as defined in section 807(e)(3) without regard to paragraph (5) of this subsection),
any contract which is an Archer MSA (as defined in section 220(d)), and
any contract which is a health savings account (as defined in section 223(d)).
The term “group life insurance contract” means any life insurance contract—
which covers a group of individuals defined by reference to employment relationship, membership in an organization, or similar factor,
the premiums for which are determined on a group basis, and
the proceeds of which are payable to (or for the benefit of) persons other than the employer of the insured, an organization to which the insured belongs, or other similar person.
Any annuity contract combined with noncancellable accident and health insurance shall be treated as a noncancellable accident and health insurance contract and not as an annuity contract.
The rules of section 816(e) shall apply for purposes of this section.
A contract which reinsures another contract shall be treated in the same manner as the reinsured contract.
An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1).
If for any taxable year there is a negative capitalization amount with respect to any category of specified insurance contracts set forth in subsection (c)(1)—
the amount otherwise required to be capitalized under this section for such taxable year with respect to any other category of specified insurance contracts shall be reduced (but not below zero) by such negative capitalization amount, and
such negative capitalization amount (to the extent not taken into account under subparagraph (A))—
shall reduce (but not below zero) the unamortized balance (as of the beginning of such taxable year) of the amounts previously capitalized under subsection (a) (beginning with the amount capitalized for the most recent taxable year), and
to the extent taken into account as such a reduction, shall be allowed as a deduction for such taxable year.
For purposes of paragraph (1), the term “negative capitalization amount” means, with respect to any category of specified insurance contracts, the percentage (applicable under subsection (c)(1) to such category) of the amount (if any) by which—
the amount determined under subparagraph (B) of subsection (d)(1) with respect to such category, exceeds
the amount determined under subparagraph (A) of subsection (d)(1) with respect to such category.
Nothing in any provision of law (other than this section or section 197) shall require the capitalization of any ceding commission incurred on or after September 30, 1990, under any contract which reinsures a specified insurance contract.
Except as provided in paragraph (2), the Secretary may provide that a type of insurance contract will be treated as a separate category for purposes of this section (and prescribe a percentage applicable to such category) if the Secretary determines that the deferral of acquisition expenses for such type of contract which would otherwise result under this section is substantially greater than the deferral of acquisition expenses which would have resulted if actual acquisition expenses (including indirect expenses) and the actual useful life for such type of contract had been used.
If the Secretary exercises his authority with respect to any type of contract under paragraph (1), the Secretary shall adjust the percentage which would otherwise have applied under subsection (c)(1) to the category which includes such type of contract so that the exercise of such authority does not result in a decrease in the amount of revenue received under this chapter by reason of this section for any fiscal year.
Treasury Regulations
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Treas. Reg. §1.848-0Outline of regulations under section 848
This section lists the paragraphs in §§ 1.848-1 through 1.848-3.
(a) Scope and effective date.
(b) Specified insurance contract.
(1) In general.
(2) Exceptions.
(i) In general.
(ii) Reinsurance of qualified foreign contracts.
(c) Life insurance contract.
(d) Annuity contract.
(e) Noncancellable accident and health insurance contract.
(f) Guaranteed renewable accident and health insurance contract.
(g) Combination contract.
(1) Definition.
(2) Treatment of premiums on a combination contract.
(i) In general.
(ii) De minimis premiums.
(3) Example.
(h) Group life insurance contract.
(1) In general.
(2) Group affiliation requirement.
(i) In general.
(ii) Employee group.
(iii) Debtor group.
(iv) Labor union group.
(v) Association group.
(vi) Credit union group.
(vii) Multiple group.
(viii) Certain discretionary groups.
(ix) Employees treated as members.
(x) Class or classes of a group determined without regard to individual health characteristics.
(A) In general.
(B) Limitation of coverage based on certain work and age requirements permissible.
(3) Premiums determined on a group basis.
(i) In general.
(ii) Exception for substandard premium rates for certain high risk insureds.
(iii) Flexible premium contracts.
(iv) Determination of actual age.
(4) Underwriting practices used by company. [Reserved]
(5) Disqualification of group.
(i) In general.
(ii) Exception for de minimis failures.
(6) Supplemental life insurance coverage.
(7) Special rules relating to the payment of proceeds.
(i) Contracts issued to a welfare benefit fund.
(ii) Credit life insurance contracts.
(iii) “Organization or association” limited to the sponsor of the contract or the group policyholder.
(i) General deductions.
(a) Net premiums.
(1) In general.
(2) Separate determination of net premiums for certain reinsurance agreements.
(b) Gross amount of premiums and other consideration.
(1) General rule.
(2) Items included.
(3) Treatment of premium deposits.
(i) In general.
(ii) Amounts irrevocably committed to the payment of premiums.
(iii) Retired lives reserves.
(4) Deferred and uncollected premiums.
(c) Policy exchanges.
(1) General rule.
(2) External exchanges.
(3) Internal exchanges resulting in fundamentally different contracts.
(i) In general.
(ii) Certain modifications treated as not changing the mortality, morbidity, interest, or expense guarantees.
(iii) Exception for contracts restructured by a court supervised rehabilitation or similar proceeding.
(4) Value of the contract.
(i) In general.
(ii) Special rule for group term life insurance contracts.
(iii) Special rule for certain policy enhancement and update programs.
(A) In general.
(B) Policy enhancement or update program defined.
(5) Example.
(d) Amounts excluded from the gross amount of premiums and other consideration.
(1) In general.
(2) Amounts received or accrued from a guaranty association.
(3) Exclusion not to apply to dividend accumulations.
(e) Return premiums.
(f) Net consideration for a reinsurance agreement.
(1) In general.
(2) Net consideration determined by a ceding company.
(i) In general.
(ii) Net negative and net positive consideration.
(3) Net consideration determined by the reinsurer.
(i) In general.
(ii) Net negative and net positive consideration.
(4) Timing consistency required.
(5) Modified coinsurance and funds-withheld reinsurance agreements.
(i) In general.
(ii) Special rule for certain funds-withheld reinsurance agreements.
(6) Treatment of retrocessions.
(7) Mixed reinsurance agreements.
(8) Treatment of policyholder loans.
(9) Examples.
(g) Reduction in the amount of net negative consideration to ensure consistency of capitalization for reinsurance agreements.
(1) In general.
(2) Application to reinsurance agreements subject to the interim rules.
(3) Amount of reduction.
(4) Capitalization shortfall.
(5) Required capitalization amount.
(i) In general.
(ii) Special rule with respect to net negative consideration.
(6) General deductions allocable to reinsurance agreements.
(7) Allocation of capitalization shortfall among reinsurance agreements.
(8) Election to determine specified policy acquisition expenses for an agreement without regard to general deductions limitation.
(i) In general.
(ii) Manner of making election.
(iii) Election statement.
(iv) Effect of election.
(9) Examples.
(h) Treatment of reinsurance agreements with parties not subject to U.S. taxation.
(1) In general.
(2) Agreements to which this paragraph (h) applies.
(i) In general.
(ii) Parties subject to U.S. taxation.
(A) In general.
(B) Effect of a closing agreement.
(3) Election to separately determine the amounts required to be capitalized for reinsurance agreements with parties not subject to U.S. taxation.
(i) In general.
(ii) Manner of making the election.
(4) Amount taken into account for purposes of determining specified policy acquisition expenses.
(5) Net foreign capitalization amount.
(i) In general.
(ii) Foreign capitalization amounts by category.
(6) Treatment of net negative foreign capitalization amount.
(i) Applies as a reduction to previously capitalized amounts.
(ii) Carryover of remaining net negative foreign capitalization amount.
(7) Reduction of net positive foreign capitalization amount by carryover amounts allowed.
(8) Examples.
(i) Carryover of excess negative capitalization amount.
(1) In general.
(2) Excess negative capitalization amount.
(3) Treatment of excess negative capitalization amount.
(4) Special rule for the treatment of an excess negative capitalization amount of an insolvent company.
(i) When applicable.
(ii) Election to forego carryover of excess negative capitalization amount.
(iii) Amount of reduction to the excess negative capitalization amount and specified policy acquisition expenses.
(iv) Manner of making election.
(v) Presumptions relating to the insolvency of an insurance company undergoing a court supervised rehabilitation or similar state proceeding.
(vi) Example.
(j) Ceding commissions with respect to reinsurance of contracts other than specified insurance contracts.
(k) Effective dates.
(1) In general.
(2) Reduction in the amount of net negative consideration to ensure consistency of capitalization for reinsurance agreements.
(3) Net consideration rules.
(4) Determination of the date on which a reinsurance agreement is entered into.
(5) Special rule for certain reinsurance agreements with parties not subject to U.S. taxation.
(6) Carryover of excess negative capitalization amount.
(a) Scope and effective dates.
(b) Interim rules.
(c) Adjustments and special rules.
(1) Assumption reinsurance.
(2) Reimbursable dividends.
(3) Ceding commissions.
(i) In general.
(ii) Amount of ceding commission.
(4) Termination payments.
(5) Modified coinsurance agreements.
(d) Examples.
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Treas. Reg. §1.848-0(a)Scope and effective dates.
Scope and effective dates.
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Treas. Reg. §1.848-0(b)Interim rules.
Interim rules.
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Treas. Reg. §1.848-0(c)Adjustments and special rules.
Adjustments and special rules.
(1) Assumption reinsurance.
(2) Reimbursable dividends.
(3) Ceding commissions.
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Treas. Reg. §1.848-0(d)Examples.
Examples.
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Treas. Reg. §1.848-0(e)Return premiums.
Return premiums.
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Treas. Reg. §1.848-0(f)Net consideration for a reinsurance agreement.
Net consideration for a reinsurance agreement.
(1) In general.
(2) Net consideration determined by a ceding company.
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Treas. Reg. §1.848-0(g)Reduction in the amount of net negative consideration to ensure consistency of capitalization for reinsurance agreements.
Reduction in the amount of net negative consideration to ensure consistency of capitalization for reinsurance agreements.
(1) In general.
(2) Application to reinsurance agreements subject to the interim rules.
(3) Amount of reduction.
(4) Capitalization shortfall.
(5) Required capitalization amount.
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Treas. Reg. §1.848-0(h)Treatment of reinsurance agreements with parties not subject to U.
Treatment of reinsurance agreements with parties not subject to U.S. taxation.
(1) In general.
(2) Agreements to which this paragraph (h) applies.
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Treas. Reg. §1.848-0(i)In general.
In general.
(ii) Amount of ceding commission.
(4) Termination payments.
(5) Modified coinsurance agreements.
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Treas. Reg. §1.848-0(j)Ceding commissions with respect to reinsurance of contracts other than specified insurance contracts.
Ceding commissions with respect to reinsurance of contracts other than specified insurance contracts.
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Treas. Reg. §1.848-0(k)Effective dates.
Effective dates.
(1) In general.
(2) Reduction in the amount of net negative consideration to ensure consistency of capitalization for reinsurance agreements.
(3) Net consideration rules.
(4) Determination of the date on which a reinsurance agreement is entered into.
(5) Special rule for certain reinsurance agreements with parties not subject to U.S. taxation.
(6) Carryover of excess negative capitalization amount.
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Treas. Reg. §1.848-0(v)Presumptions relating to the insolvency of an insurance company undergoing a court supervised rehabilitation or similar state proceeding.
Presumptions relating to the insolvency of an insurance company undergoing a court supervised rehabilitation or similar state proceeding.
(vi) Example.
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Treas. Reg. §1.848-0(x)Class or classes of a group determined without regard to individual health characteristics.
Class or classes of a group determined without regard to individual health characteristics.
(A) In general.
(B) Limitation of coverage based on certain work and age requirements permissible.
(3) Premiums determined on a group basis.
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Treas. Reg. §1.848-1Definitions and special provisions
(a) Scope and effective date. The definitions and special provisions in this section apply solely for purposes of determining specified policy acquisition expenses under section 848 of the Internal Revenue Code, this section, and §§ 1.848-2 and 1.848-3. Unless otherwise specified, the rules of this section are effective for the taxable years of an insurance company beginning after November 14, 1991.
(b) Specified insurance contract—(1) In general. A “specified insurance contract” is any life insurance contract, annuity contract, noncancellable or guaranteed renewable accident and health insurance contract, or combination contract. A reinsurance agreement that reinsures the risks under a specified insurance contract is treated in the same manner as the reinsured contract.
(2) Exceptions—(i) In general. A “specified insurance contract” does not include any pension plan contract (as defined in section 818(a)), flight insurance or similar contract, or qualified foreign contract (as defined in section 807(e)(3)).
(ii) Reinsurance of qualified foreign contracts. The exception for qualified foreign contracts does not apply to reinsurance agreements that reinsure qualified foreign contracts.
(c) Life insurance contract. A “life insurance contract” is any contract—
(1) Issued after December 31, 1984, that qualifies as a life insurance contract under section 7702(a) (including an endowment contract as defined in 7702(h)); or
(2) Issued prior to January 1, 1985, if the premiums on the contract are reported as life insurance premiums on the insurance company's annual statement (or could be reported as life insurance premiums if the company were required to file the annual statement for life and accident and health companies).
(d) Annuity contract. An “annuity contract” is any contract (other than a life insurance contract as defined in paragraph (c) of this section) if amounts received under the contract are subject to the rules in section 72(b) or section 72(e) (determined without regard to section 72(u)). The term “annuity contract” also includes a contract that is a qualified funding asset under section 130(d).
(e) Noncancellable accident and health insurance contract. The term “noncancellable accident and health insurance contract” has the same meaning for purposes of section 848 as the term has for purposes of section 816(b).
(f) Guaranteed renewable accident and health insurance contract. The term “guaranteed renewable accident and health insurance contract” has the same meaning for purposes of section 848 as the term has for purposes of section 816(e).
(g) Combination contract—(1) Definition. A “combination contract” is a contract (other than a contract described in section 848(e)(3)) that provides two or more types of insurance coverage, at least one of which if offered separately would be a life insurance contract, an annuity contract, or a noncancellable or guaranteed renewable accident and health insurance contract.
(2) Treatment of premiums on a combination contract—(i) In general. If the premium allocable to each type of insurance coverage is separately stated on the insurance company's annual statement (or could be separately stated if the insurance company were required to file the annual statement for life and accident and health companies), the premium allocable to each type of insurance coverage in a combination contract is subject to the capitalization rate, if any, that would apply if that coverage was provided in a separate contract. If the premium allocable to each type of insurance coverage in a combination contract is not separately stated, the entire premium is subject to the highest capitalization percentage applicable to any of the coverages provided.
(ii) De minimis premiums. For purposes of this paragraph (g)(2)—
(A) A de minimis premium is not required to be separately stated;
(B) In determining the highest capitalization percentage applicable to a combination contract, the coverage to which a de minimis premium is allocable is disregarded;
(C) If the separate statement requirement of this paragraph (g)(2) is satisfied, a de minimis premium is treated in accordance with its characterization on the insurance company's annual statement; and
(D) Whether a premium for an insurance coverage is de minimis is determined by comparing that premium with the aggregate of the premiums for the combination contract. A premium that is not more than 2 percent of the premium for the entire contract is considered de minimis. Whether a premium that is more than 2 percent is de minimis is determined based on all the facts and circumstances.
(3) Example. The principles of this paragraph (g) are illustrated by the following example.
(h) Group life insurance contract—(1) In general. A life insurance contract (as defined in paragraph (c) of this section) is group life insurance contract if—
(i) The contract is a group life insurance contract under the applicable law;
(ii) The coverage is provided under a master contract issued to the group policyholder, which may be a trust, trustee, or agent;
(iii) The premiums on the contract are reported either as group life insurance premiums or credit life insurance premiums on the insurance company's annual statement (or could be reported as group life insurance premiums or credit life insurance premiums if the company were required to file the annual statement for life and accident and health companies);
(iv) The group affiliation requirement of paragraph (h)(2) of this section is satisfied;
(v) The premiums on the contract are determined on a group basis within the meaning of paragraph (h)(3) of this section; and
(vi) The proceeds of the contract are not payable to or for the benefit of the insured's employer, an organization or association to which the insured belongs, or other similar person. (See paragraph (h)(7) of this section for special rules that apply in determining if this requirement is satisfied.)
(2) Group affiliation requirement—(i) In general. The group affiliation requirement of section 848(e)(2)(A) and this paragraph (h)(2) is satisfied only if all of the individuals eligible for coverage under the contract constitute a group described in paragraphs (h)(2) (ii) through (viii) of this section.
(ii) Employee group. An employee group consists of all of the employees (including statutory employees within the meaning of section 3121(d)(3) and individuals who are treated as employed by a single employer under section 414 (b), (c), or (m)), or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of an employer. For this purpose, the term “employee” includes—
(A) A retired or former employee;
(B) The sole proprietor, if the employer is a sole proprietorship;
(C) A partner of the partnership, if the employer is a partnership;
(D) A director of the corporation, if the employer is a corporation; and
(E) An elected or appointed official of the public body, if the employer is a public body.
(iii) Debtor group. A debtor group consists of all of the debtors, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of a creditor. For this purpose, the term “debtor” includes a borrower of money or purchaser or lessee of goods, services, or property for which payment is arranged through a credit transaction.
(iv) Labor union group. A labor union group consists of all of the members, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of a labor union or similar employee organization.
(v) Association group. An association group consists of all of the members, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of an association that, at the time the master contract is issued—
(A) Is organized and maintained for purposes other than obtaining insurance;
(B) Has been in active existence for at least two years (including, in the case of a merged or successor association, the years of active existence of any predecessor association); and
(C) Has at least 100 members.
(vi) Credit union group. A credit union group consists of all of the members or borrowers, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of a credit union.
(vii) Multiple group. A multiple group consists of two or more groups from any single category described in paragraphs (h)(2) (ii) through (vi) of this section. A multiple group may not include two or more groups from different categories described in paragraph (h)(2) (ii) through (vi) of this section.
(viii) Certain discretionary groups. Provided that the contract otherwise satisfies the requirements of paragraph (h)(1) of this section, a contract issued to one of the following discretionary groups is treated as satisfying the group affiliation requirement of this paragraph (h)(2)—
(A) A contract issued to a group consisting of students of one or more universities or other educational institutions;
(B) A contract issued to a group consisting of members or former members of the U.S. Armed Forces;
(C) A contract issued to a group of individuals for the payment of future funeral expenses; and
(D) A contract issued to any other discretionary group as specified by the Commissioner in subsequent guidance published in the Internal Revenue Bulletin. (See § 601.601(d)(2)(ii)(b) of this chapter.)
(ix) Employees treated as members. In determining whether the group affiliation requirement of paragraph (h)(2) of this section is satisfied, the employees of a labor union, credit union, or association may be treated as members of a labor union group, a credit union group, or an association group, respectively.
(x) Class or classes of a group determined without regard to individual health characteristics—(A) In general. A class or classes of a group described in paragraphs (h)(2) (ii) through (viii) of this section may be determined using any reasonable characteristics (for example, amount of insurance, location, or occupation) other than individual health characteristics. The employees of a single employer covered under a policy issued to a multi-employer trust are considered a class of a group described in paragraph (h)(2)(ii) of this section.
(B) Limitation of coverage based on certain work and age requirements permissible. A limitation of coverage under a group contract to persons who are actively at work or of a pre-retirement age (for example, age 65 or younger) is not treated as based on individual health characteristics.
(3) Premiums determined on a group basis—(i) In general. Premiums for a contract are determined on a group basis for purposes of section 848(e)(2)(B) and this paragraph (h) only if the premium charged by the insurance company for each member of the group (or any class thereof) is determined on the basis of the same rates for the corresponding amount of coverage (for example, per $1,000 of insurance) or on the basis of rates which differ only because of the gender, smoking habits, or age of the member.
(ii) Exception for substandard premium rates for certain high risk insureds. Any difference in premium rates is disregarded for purposes of this paragraph (h)(3) if the difference is charged for an individual who was accepted for coverage at a substandard rate prior to January 1, 1993.
(iii) Flexible premium contracts. In the case of a group universal life insurance contract, the identical premium requirement is satisfied if the premium rates used by the insurance company in determining the periodic mortality charges applied to the policy account value of any member insured by the contract differ from those of other members (within the same class) only because of the gender, smoking habits, or age of the member.
(iv) Determination of actual age. For purposes of this paragraph (h)(3), determinations of actual age may be made using any reasonable method, provided that this method is applied consistently for all members of the group.
(4) Underwriting practices used by company. [Reserved]
(5) Disqualification of group—(i) In general. Except as otherwise provided in this paragraph (h)(5), if the requirements of paragraphs (h)(1), (2), and (3) of this section are not satisfied with respect to one or more members of the group, or of a class within a group (within the meaning of paragraph (h)(2)(x) of this section), the premiums for the entire group (or class) are treated as individual life insurance premiums.
(ii) Exception for de minimis failures. If the requirements of paragraphs (h) (1), (2), or (3) of this section are not satisfied with respect to one or more members of the group (or class), but the sum of the premiums charged by the insurance company for those individuals is no more than 5 percent of the aggregate premiums for the group (or class), only the premiums charged for those individuals are treated as premiums for an individual life insurance contract.
(6) Supplemental life insurance coverage. For purposes of determining whether the requirement in paragraph (h)(3)(i) of this section is satisfied, any supplemental life insurance coverage (including optional coverage for members of the group, their spouses, or their dependent children) is (or is treated as) a separate contract. In determining whether the group affiliation requirement of paragraph (h)(2) of this section is satisfied for the supplemental coverage, a member's spouse and dependent children are treated as members of the group if they are eligible for coverage.
(7) Special rules relating to the payment of proceeds. The following rules apply for purposes of section 848(e)(2) and paragraph (h)(1)(vi) of this section.
(i) Contracts issued to a welfare benefit fund. If a contract issued to a welfare benefit fund (as defined in section 419) provides for payment of proceeds to the welfare benefit fund, the proceeds of the contract are not considered payable to or for the benefit of the insured's employer, an organization or association to which the insured belongs, or other similar person, provided the proceeds are paid as benefits to the employee or the employee's beneficiary.
(ii) Credit life insurance contracts. If a credit life insurance contract provides for payment of proceeds to the insured's creditor, the proceeds of the contract are not treated as payable to or for the benefit of the insured's employer, an organization or association to which the insured belongs, or other similar person, provided the proceeds are applied against an outstanding indebtedness of the insured.
(iii) “Organization or association” limited to the sponsor of the contract or the group policyholder. The term “organization or association” means the organization or association that is either the sponsor of the contract or the group policyholder.
(i) General deductions. The term “general deductions” is defined in section 848(c)(2). An insurance company determines its general deductions for the taxable year without regard to amounts capitalized or amortized under section 848(a). The amount of a company's general deductions is also determined without regard to the rules of § 1.848-2(f), which apply only for purposes of determining net consideration for reinsurance agreements.
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Treas. Reg. §1.848-1(a)Scope and effective date.
Scope and effective date. The definitions and special provisions in this section apply solely for purposes of determining specified policy acquisition expenses under section 848 of the Internal Revenue Code, this section, and §§ 1.848-2 and 1.848-3. Unless otherwise specified, the rules of this section are effective for the taxable years of an insurance company beginning after November 14, 1991.
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Treas. Reg. §1.848-1(b)Specified insurance contract—(1) In general.
Specified insurance contract—(1) In general. A “specified insurance contract” is any life insurance contract, annuity contract, noncancellable or guaranteed renewable accident and health insurance contract, or combination contract. A reinsurance agreement that reinsures the risks under a specified insurance contract is treated in the same manner as the reinsured contract.
(2) Exceptions—(i) In general. A “specified insurance contract” does not include any pension plan contract (as defined in section 818(a)), flight insurance or similar contract, or qualified foreign contract (as defined in section 807(e)(3)).
(ii) Reinsurance of qualified foreign contracts. The exception for qualified foreign contracts does not apply to reinsurance agreements that reinsure qualified foreign contracts.
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Treas. Reg. §1.848-1(c)Life insurance contract.
Life insurance contract. A “life insurance contract” is any contract—
(1) Issued after December 31, 1984, that qualifies as a life insurance contract under section 7702(a) (including an endowment contract as defined in 7702(h)); or
(2) Issued prior to January 1, 1985, if the premiums on the contract are reported as life insurance premiums on the insurance company's annual statement (or could be reported as life insurance premiums if the company were required to file the annual statement for life and accident and health companies).
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Treas. Reg. §1.848-1(d)Annuity contract.
Annuity contract. An “annuity contract” is any contract (other than a life insurance contract as defined in paragraph (c) of this section) if amounts received under the contract are subject to the rules in section 72(b) or section 72(e) (determined without regard to section 72(u)). The term “annuity contract” also includes a contract that is a qualified funding asset under section 130(d).
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Treas. Reg. §1.848-1(e)Noncancellable accident and health insurance contract.
Noncancellable accident and health insurance contract. The term “noncancellable accident and health insurance contract” has the same meaning for purposes of section 848 as the term has for purposes of section 816(b).
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Treas. Reg. §1.848-1(f)Guaranteed renewable accident and health insurance contract.
Guaranteed renewable accident and health insurance contract. The term “guaranteed renewable accident and health insurance contract” has the same meaning for purposes of section 848 as the term has for purposes of section 816(e).
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Treas. Reg. §1.848-1(g)Combination contract—(1) Definition.
Combination contract—(1) Definition. A “combination contract” is a contract (other than a contract described in section 848(e)(3)) that provides two or more types of insurance coverage, at least one of which if offered separately would be a life insurance contract, an annuity contract, or a noncancellable or guaranteed renewable accident and health insurance contract.
(2) Treatment of premiums on a combination contract—(i) In general. If the premium allocable to each type of insurance coverage is separately stated on the insurance company's annual statement (or could be separately stated if the insurance company were required to file the annual statement for life and accident and health companies), the premium allocable to each type of insurance coverage in a combination contract is subject to the capitalization rate, if any, that would apply if that coverage was provided in a separate contract. If the premium allocable to each type of insurance coverage in a combination contract is not separately stated, the entire premium is subject to the highest capitalization percentage applicable to any of the coverages provided.
(ii) De minimis premiums. For purposes of this paragraph (g)(2)—
(A) A de minimis premium is not required to be separately stated;
(B) In determining the highest capitalization percentage applicable to a combination contract, the coverage to which a de minimis premium is allocable is disregarded;
(C) If the separate statement requirement of this paragraph (g)(2) is satisfied, a de minimis premium is treated in accordance with its characterization on the insurance company's annual statement; and
(D) Whether a premium for an insurance coverage is de minimis is determined by comparing that premium with the aggregate of the premiums for the combination contract. A premium that is not more than 2 percent of the premium for the entire contract is considered de minimis. Whether a premium that is more than 2 percent is de minimis is determined based on all the facts and circumstances.
(3) Example. The principles of this paragraph (g) are illustrated by the following example.
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Treas. Reg. §1.848-1(h)Group life insurance contract—(1) In general.
Group life insurance contract—(1) In general. A life insurance contract (as defined in paragraph (c) of this section) is group life insurance contract if—
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Treas. Reg. §1.848-1(i)General deductions.
General deductions. The term “general deductions” is defined in section 848(c)(2). An insurance company determines its general deductions for the taxable year without regard to amounts capitalized or amortized under section 848(a). The amount of a company's general deductions is also determined without regard to the rules of § 1.848-2(f), which apply only for purposes of determining net consideration for reinsurance agreements.
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Treas. Reg. §1.848-1(v)Association group.
Association group. An association group consists of all of the members, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of an association that, at the time the master contract is issued—
(A) Is organized and maintained for purposes other than obtaining insurance;
(B) Has been in active existence for at least two years (including, in the case of a merged or successor association, the years of active existence of any predecessor association); and
(C) Has at least 100 members.
(vi) Credit union group. A credit union group consists of all of the members or borrowers, or any class or classes thereof within the meaning of paragraph (h)(2)(x) of this section, of a credit union.
(vii) Multiple group. A multiple group consists of two or more groups from any single category described in paragraphs (h)(2) (ii) through (vi) of this section. A multiple group may not include two or more groups from different categories described in paragraph (h)(2) (ii) through (vi) of this section.
(viii) Certain discretionary groups. Provided that the contract otherwise satisfies the requirements of paragraph (h)(1) of this section, a contract issued to one of the following discretionary groups is treated as satisfying the group affiliation requirement of this paragraph (h)(2)—
(A) A contract issued to a group consisting of students of one or more universities or other educational institutions;
(B) A contract issued to a group consisting of members or former members of the U.S. Armed Forces;
(C) A contract issued to a group of individuals for the payment of future funeral expenses; and
(D) A contract issued to any other discretionary group as specified by the Commissioner in subsequent guidance published in the Internal Revenue Bulletin. (See § 601.601(d)(2)(ii)(b) of this chapter.)
(ix) Employees treated as members. In determining whether the group affiliation requirement of paragraph (h)(2) of this section is satisfied, the employees of a labor union, credit union, or association may be treated as members of a labor union group, a credit union group, or an association group, respectively.
16 Citing Cases
Charles was also charged and found guilty on three counts for filing false tax returns for the years 1985 and 1986 in violation of section 7206(1). Charles was subsequently convicted on the final count and was ordered to forfeit his profits from the illicit activities to the U.S. Government. The District Court found that Charles and the o